Qantas blinks first in Virgin battle, with domestic capacity freeze

By Jamie Freed

22 May 2014 — 3:00am

Qantas has finally blinked in a vicious capacity battle with Virgin Australia that could result in the larger carrier reporting a record loss approaching $1 billion.

Qantas will freeze domestic capacity in the first three months of the financial year because of weak consumer confidence and a slowdown in the mining sector that have hit at a time when capacity has outstripped demand.

Qantas could report a record bottom-line loss approaching $1billion.

Photo: Louise Kennerley

It marks the formal abandonment of a strategy of maintaining a line in the sand at 65 per cent domestic market share, which was meant to maximise profitability.

In January, Qantas chief financial officer Gareth Evans said ''stepping back from the 65 per cent would effectively be waving the white flag''.

Alan Joyce: happy with 63 per cent.

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Qantas chief executive Alan Joyce had led a campaign seeking a debt guarantee from the federal government to level the playing field against foreign-backed Virgin, in a move that might have prolonged the capacity battle.

But Prime Minister Tony Abbott in February turned down the request, offering instead to push for foreign ownership restrictions on Qantas to be lifted, in a move that has yet to be approved by the Senate.

In a presentation to investors at the Macquarie conference in Sydney this month, Mr Joyce indicated the carrier's market share stance was softening.

He said the airline was comfortable with its current position of about 63 per cent and was more focused on maintaining frequency and network advantages that help attract and retain customers.

The airline on Wednesday told investors total domestic capacity growth, including Qantas, QantasLink and Jetstar, would be ''zero in each of the first three months of financial year 2015 compared with the prior corresponding period''.

But the statement left room for Qantas to cut capacity in the mainline division while adding it in Jetstar, if it chooses, in line with long-running trends.

Qantas provided the update to the market alongside weak April traffic statistics, with the timing linked to it pulling some flights and placing smaller aircraft on others for the July-to-September period.

Qantas had not publicly released its capacity plans for the September quarter, but it is understood it was budgeting for a 2.5 per cent increase before it made the decision to place growth on hold.

''The key takeaway here is I think most of the market had capacity still being added in the first half of [financial year] 2015,'' Merrill Lynch analyst Matthew Spence said of forecasts before the update.

''[The freeze] helps rebalance the supply-demand equation. But I don't think yields are going to lift particularly quickly.'' The decision to freeze capacity is said to have been influenced in part by a visit by Mr Joyce to Western Australia last month, where he met leaders of mining companies who spoke of cutting costs and less travel. Some of the Qantas capacity cuts are to intra-WA flights and flights from the east coast to the Pilbara.

Analyst consensus expectations before the update were for Qantas to report a full-year underlying loss before tax of $700 million and Virgin a full-year loss before tax of $192 million. CIMB analyst Mark Williams on Wednesday slashed his Qantas forecast by 18 per cent to $770 million and other analysts were also recutting their numbers after the disappointing traffic figures.

The consensus figures exclude one-off charges, such as redundancy payments, which in Qantas' case could cost more than $200 million due to its plans to cut 2200 jobs by the end of the financial year. That could push Qantas' bottom-line loss towards $1 billion.

Qantas shares closed 1.5¢ lower at $1.225 on Wednesday.

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Qantas has said it will cut 4000 jobs and $800 million of costs by the end of the 2015 financial year, a period during which it also expects to lower its debt levels by $1 billion.

Virgin chief executive John Borghetti on Wednesday declined to comment on Qantas' capacity freeze. He said both carriers were trying to earn money, but it was a ''tough industry and tough times''.